On this day 233 years ago, towards the beginning of the American War of Independence, at the start of the Industrial Revolution, and two years before the first European settlement in Australia, a Scottish economist named Adam Smith published a book entitled An Inquiry into the Nature and Causes of the Wealth of Nations. The book, which advocated a free market economy, contained a comprehensive and largely accurate description of economic mechanisms which still exist, so that Adam Smith is still frequently quoted in discussions of economics and free markets.
One of the important concepts in Smith’s work was meritocracy. People naturally want to do things to improve their situation, and if different people concentrate on doing what they do best, everybody benefits. An unintentional benefit of individuals’ pursuit of their own wants and needs is that this results in an efficient division of labour, and an “invisible hand” seems to guide the market leading to economic prosperity.
Smith’s book was one of the key works that gave rise to the modern academic discipline of economics. Smith is credited with the theory that in an efficient market an individual will invest a resource so as to earn the highest possible return on it. This leads to the efficient allocation of resources, because people will keep reallocating their resources until they yield the highest available risk-adjusted rate of return.